Cost Approach

Under the cost approach, value equals what the lot is worth plus what it would cost to put up the same building today, less an allowance for age and wear. Appraisers use it most for new or unusual buildings. In BRRRR it matters mainly as a reminder that renovation spending and appraised value are not the same thing.

Depreciation in the cost approach includes physical wear, outdated design and problems outside the property, like a busy road. A rehab reduces physical and design depreciation, but the value it adds is capped by what the market will pay, not by the invoice total.

Insurers use a similar replacement-cost idea to set dwelling coverage. That is why the insured amount on a rental can sit well above or below the after-repair value the lender used at the refinance.

Further reading: Cost Approach on Wikipedia.